1. Hoang Le Cong – Finished on October 25th
Stock pitch – Long recommendation for SBUX
Recommendation
I recommend longing Starbucks (SBUX), an American coffee company and coffeehouse
chain, which currently trade at $53.67 per share because it is undervalued by 5-10% and it has a
stable outlook for long-term growth due to its domination of the US market and its rapid global
expansion. Starbucks operates more than 20,000 stores in over 60 countries and it outperforms
other players by far in term of region and store counts. Dunkin have about 10,000 store and
Costa Café only have 3,000 stores. Another thing that Starbucks have done right is acquiring
Seattle Coffee Company, which operates Seattle’s Best Coffee, and keep it as a separate brand
for people who dislike the Starbucks Brand.
Catalyst to increase share price is the expansionary trend in coffee consumption,
especially emerging market such as South East Asia, China, and Brazil. ICO reports coffee
consumption of Asia & Oceania has a compound annual growth rate (CAGR) of 3.7% for the
last 4 years while Europe, comprise 30% of world coffee consumption of all form, only has a
CAGR of 0.7%. China is one big gold-mine for Starbucks because its coffee consumption in
China came to 1.9 billion in 2013/2014, which has been growing around 16% annum. However,
per capita coffee consumption only amount to 5 to 6 cups per year. Coffee drinking hadn’t been
customary in the past for Asian countries so the potential market for coffee is enormous
Starbucks’s plan to double its store count in China to 5000 is a push in the right direction. The
last catalyst is the opening of new store in Italy in 2017. Italy is the top 18 coffee consuming
country with 3.4kg per capita with a well-developed market. Taking market share from Italy is a
nice move for Starbucks for global expansion
Key investment risk is that it’s hard to take market share from emerging market,
especially southeast Asian countries due to price and difference in culture. If Starbucks fail to
find the correct formula to increase its market share, they will lose money. New store opening in
Italy fail to boost revenue, both in long and short term, due to consumer’s developed taste and
preference. An interesting fact is that Starbucks get their short term boost in revenue from new
store opening but what would happen if new stores fail to get consistent or sustainable revenue
2. Hoang Le Cong – Finished on October 25th
growth in the long term. We could mitigate these risk either through covered calls or protective
put option.
Company Background
Starbucks is a global coffee company and coffee house chain with stores over 60
countries in the world with four products: coffee, handcrafted beverages, merchandise, fresh
food, and consumer products. Total revenue in FY 2015 was $19.162 billion with EBITDA of
$4.9 billion (25.6% margin), and the company has revenue grown between 10-12% for the last 3
years mostly through new stores opening, especially in Asian countries, and corporate
innovation.
Starbucks currently trades at trailing multiples of 3.896x EV/Revenue, and 16.11x
EV/EBITDA. Forward multiples in our revenue and margin assumption are 3.9x EV/Revenue
and 15.9x EV/EBITDA.
Investment Thesis
The market views Starbucks as the leading global company in the industry both in store
counts and region served and as a result, the stock is traded at the top of the range in the industry.
However, this is a good time to buy SBUX because of the following reason:
1. New store opening in Italy in 2017 and new revenue boost for coming with it.
Starbucks have been constantly expanding and taking market share from Costa
Coffee, a British Multinational Coffeehouse company.
2. There is less downside in expanding into the European market because of developed
coffee drinking cultures and the developed market. Emerging market, especially Asia,
is populous and high potential but tea or milk tea has been the to go choice for people
rather than coffee. Also, the difference in culture and taste preference is what have
been preventing Starbucks from taking a significant amount of market share.
3. Although Starbucks revenue has been rapidly growing since 2010, the net income
hasn’t been stable lately due to the fluctuation in coffee price during 2012-2014.
More importantly, Starbucks get revenue boost from opening new stores but it is also
costly to establish a new settlement. However, for the next five year, established store
3. Hoang Le Cong – Finished on October 25th
in the emerging market such as China, Southeast Asia, Brazil might start generate
more revenue as the coffee drinking culture has become more popular compared to
the past.
4. What Starbucks did right in the past was acquiring Seattle Coffee Company and keep
the Seattle’s Best Coffee brand to get customers who dislike Starbucks. In order to
have big success in the Asian market, Starbucks should acquire a teahouse chain and
keep it operating under the umbrella. They could study the market through that and
either adapt new product for the Asian market or acquiring new teahouse chain.
Each of the reason above tie directly to the current global outlook of the industry and
from data provided by International Coffee Organization (ICO), SPEEDA. You can see that #1
will have a substantial impact to the company in the short term but #2, #3, and #4 will have a big
impact in the long run. However, even if the reason above turns out wrong, any of the factor
differs substantially from the market view could result in a substantial upside.
Even if all of the factors above is incorrect, Starbucks as the current global leader in the
industry would represent minimum downside risk, even if there’s no room for price appreciation.
We also have dividend payment coming up in November as well.
Catalyst
Catalyst in the next 6-12 months include
1. The company’s earnings release for FY 2016
2. First Starbucks store opening in Milan, Italy in early 2017
3. Report of how Teavana perform globally in general and in Asia specifically.
Catalyst 2 and 3 are most important in term of company evaluation.
Risk
The top risk factor includes
New store opening in Milan fails to boost revenue and get market share
Teavana new product launch fail to crack the Asian market
SBUX currently below 200 days MA and volatile market.
